Trust Settlement FAQ
A trust, revocable or irrevocable is a private document. Once a grantor transfers property into the trust, a trustee holds legal title for the benefit of one or more beneficiaries, who are the beneficial owners. Three parties must be present in the trust creation: the grantor, trustee and the beneficiary although for a revocable trust, the grantor may also be the trustee and primary beneficiary. Upon the grantor’s death, the trust terms become fixed, or irrevocable, and there must be a remainder beneficiary for ongoing administration.
A trust must be funded to have any legal effect and one does so by transferring property into the name of the trust by re-titling it into the name of the trust. One may also purchase assets in the name of the trust once it is settled.The grantor may transfer such assets as individually held bank and brokerage accounts, LLC interests, corporate stock and assign artwork or jewelry to the trust. Finally, a grantor may transfer real property to a trust by either purchasing the real property in the name of the trust or by re-titling the deed into the name of the trust.
Under New York law, you may not disinherit your spouse. If you are married and fail to provide for your spouse in your Will, then absent a prenuptial agreement or extraordinary circumstances, your spouse has a right of election to collect the greater of $50,000 or one-third of your estate if you have a Will. If you do not have a Will, then based upon your remaining biological or formally adopted family members, your surviving spouse will be entitled to a minimum of $50,000 plus one half of the rest of your estate, excluding exempt property like household items and the family car.
A testamentary trust is a trust that is contained in a Will. Testamentary trusts are effective upon the death of the Will maker and are subject to oversight by the Surrogate's Court. Generally, testamentary trusts are created for young children, relatives with disabilities, or others who may receive large inheritances but might lack the ability to properly manage them. Testamentary trusts are subject to ongoing oversight and administration fees by the Surrogate’s Court.
An irrevocable life insurance trust, or ILIT, allows the grantor to place one or more insurance policies into an irrevocable trust for the benefit of one or more beneficiaries. Once the grantor transfers an insurance policy to an ILIT, the grantor may not take the policy back in his or her own name, nor serve as a trustee or a beneficiary. The grantor may, however, dictate whom the ILIT beneficiaries will be and define the terms under which they will receive ILIT funds. Once the grantor settles the ILIT, the grantor must send written requests to the trustee in order to fund it. Properly settled, the ILIT funds are not part of one's taxable estate after three (3) years and upon the grantor's death, loved ones are provided with quick and oftentimes sorely needed liquid assets to administer the grantor's estate.
A credit shelter trust, otherwise known as a bypass trust, allows married couples to reduce estate taxes by taking advantage of their combined federal and state estate tax exemptions. The surviving spouse has access to the income from the property transferred to the trust without it being included in his or her own estate. Each spouse executes a trust to "shelter" his/her/their exemption amount. Income from the shelter trust along with trust principal will be made available to the surviving spouse, at the discretion of the trustee. As the surviving spouse does not control distributions of principal, shelter trust funds are not included in his or her estate, nor are they subject to estate tax upon the death of the surviving spouse. Shelter trust funds, along with the unused portion of the surviving spouse’s marital trust, flow through to the remainder beneficiaries who are usually the children.
A QDOT is a type of grantor trust for the benefit of non-US citizen spouses. Settling a QDOT allows a non-citizen surviving spouse to take advantage of the marital deduction for all estate taxes. A QDOT only protects the assets of decedents who have died after November 10, 1998. One trustee of a QDOT must be a U.S. citizen or a domestic corporation that is authorized to retain estate taxes. Although a valid QDOT allows for the qualifying non-citizen surviving spouse to take the marital deduction on assets within the trust, the trust is not exempt from paying estate tax. Estate tax is merely deferred until the death of the surviving non-citizen spouse.
A SLAT is a type of grantor trust that is taxed to the trust grantor so that the trust funds grow tax free. SLATs are similar to ILITs and can avoid the paperwork required for withdrawals from ILITs. In addition, SLATs unlock life insurance cash values for the living needs of the surviving spouse. The lifetime distributions to the spousal beneficiary are limited to an ascertainable standard such as health, education, maintenance and support.
A Pet Trust is settled for the benefit of a domestic animal. Although animal rights have increased significantly during the last couple of decades, pets are still considered as personal property. As a result, one may not leave excessive property outright to one’s pet in a pet trust and the amount left in a pet trust must be deemed reasonable by the court. A decent earmark is that no more than $35,000 to $40,000 should be left for one’s pet in pet trust and this bequest should be accompanied with a clear plan for the trustee to distribute remaining funds to a contingent beneficiary.
An SNT allows funds to be made available to a disabled person without such funds being counted against Medicaid and SSI proceeds. SNT requirements include: SNT funds may never be given directly to a SNT beneficiary and SNT funds may only supplement, not supplant, governmental benefits. Should a disabled person receive lawsuit proceeds yet also has large medical expenses, without a SNT, he or she might quickly exhaust such lawsuit proceeds. Current recipients of Medicaid and/or SSI benefits, disabled individuals who are potential recipients of Medicaid, SSI or other means-tested benefits, individuals with a long-term history of mental illness who will likely require medical /psychiatric care throughout their lifetime, and individuals with conditions such as dementia who will likely require long term care, might all benefit from the use of an SNT.